Commerical Real Estate Deal
 

This Issue -- Thursday, August 11, 2005

Commercial Real Estate Deal - Hospitals Stay Healthy
by Outsourcing Real Estate

by Andy and David Farbman

The outsourcing approach that lets health care providers focus on core services is spreading to a new administrative corner - property management - and with good reason. In response to the need for cost reductions and aggressive asset management, healthcare managers have already increased efficiency and trimmed operating expenses by using outside providers for food and nutrition services, housekeeping, security, etc. Getting out of the landlord business gives health care providers the flexibility to focus on increased efficiency, revenue and strategic planning in their core business of medical care delivery. Continued on next page>>
 

Outlook - U.S. Economy Growing, but Michigan Lags

The national economy grew in June and July, according to the Federal Reserve Board's Beige Book. While the economy is up overall, growth is unsteady from region to region. Michigan continues to lag behind the rest of the country. U.S. retail sales were up, with autos leading the way, but employee discount bargains did not boost sales in the Detroit region as much as in other areas. On the bright side, Michigan tourism is picking up again, with an increase in hotel bookings so far this summer. Other Q2 events affecting the economic outlook:

  • The dollar rose in value relative to foreign currencies such as the British pound, the Japanese yen and the euro. As a side note, in Q2, China unpegged the yuan from the U.S. dollar, taking the first step toward a free-floating currency.
  • Fresh terrorist attacks in London and Sharm el-Sheikh, Egypt remind us that militant Islamic terrorism will continue to burden societies and economies around the world.
  • Higher energy prices will hit the national and global economy, according to a report from Pittsburgh-based PNC Bank. North American energy costs will be particularly magnified if the 2005 hurricane season diminishes refinery capacity in the Gulf of Mexico.

"These national economic trends are positive when taken as a whole," said Andy Gutman, CFO of NAI Farbman. "But it remains to be seen when the economic picture will brighten in Michigan. Rising energy prices have the potential of compounding Michigan's economic angst by further damaging the business outlook for the domestic Big Three."
 

Residential Trends - From Urban Hotel to Condo

More and more urban luxury hotels are closing their doors to the traveling public and converting into exclusive condominiums. Top-marque hotels with cachet are able to draw a 20 percent lease premium over competitors, according to the San Francisco Examiner. San Francisco's swanky Fairmount Hotel will be converted into luxury condos, as will New York's venerable Plaza Hotel on Fifth Avenue and 59th Street. The Plaza is perhaps the most iconic illustration of a posh hotel morphing into plush condos. Even Detroit's faded grand dame of luxury hotels, the long-vacant Book Cadillac Hotel, might be redeveloped as part hotel/part condo. "Hybrid hotel/condo buildings often offer condo owners hotel-like amenities, including room service, valet and housekeeping," said Andy Farbman of NAI Farbman. "We will continue to see this type of redevelopment activity, because the market has responded positively."
 

Real Estate Investing - Where the Smart Money Goes

In the stock market, some investors do better buying equities when they are on sale. The same goes for real estate. Landmark buildings in hot metros like New York or Los Angeles aren't for everybody. David Lichtenstein, for example, built his $3 billion portfolio primarily by investing in smaller-markets, according to a recent profile in The Wall Street Journal. Sometimes the coasts aren't the best place to look for a solid return. "Following Lichtenstein's logic, unassuming places like Lake Orion or Roseville might be better bets than high price-per-square-foot markets on the coasts," said David Farbman of NAI Farbman. "Every investor has to do a gut check, but sometimes a more conservative investment will offer a better return in the long run."
 

Retailing - A&P Jettisons Farmer Jack, Food Basics

The Great Atlantic & Pacific Tea Company (A&P) is getting out of Canada and the American Midwest. The company announced that it will sell A&P Canada to METRO, Inc., a Canadian grocery retailer, for nearly $1.5 billion. A&P Canada is made up of 236 stores and four distribution centers, all located in Ontario and Québec. The move is part of a major restructuring plan that includes the divestiture of the company's Farmer Jack and Food Basics stores, effectively removing the company from the marketplace in Michigan and Ohio. Coupled with the move out of Canada, that would give A&P the ability to focus its efforts on the east coast. As part of the divestiture, 10 Food Basics stores as well as several underperforming Farmer Jack stores will close in Michigan and Ohio. "The impact on the tri-county area, home to 70 Farmer Jack supermarkets, will be huge," said Michael Kalil of NAI Farbman. "Farmer Jack is in many cases the single anchor in many suburban developments -- neighboring retailers need to pay attention as this story develops to be sure that they don't lose a nearby Farmer Jack, and with it, a large chunk of their own traffic and revenue."
 

Architecture - Nation's Largest Skyscraper Planned for Chicago

A 2,000 foot-tall residential skyscraper with the slender, twisting silhouette of gemelli pasta is being planned for Chicago. The Fordham Spire, as it is called, would eclipse the Sears Tower as the tallest building in the United States. The Fordham Spire was designed by Spanish architect Santiago Calatrava, whose other work includes the Olympic Sports Complex in Athens and BCE Place in Toronto. "In spite of the many eulogies written for the skyscraper since 2001, there are plenty of ambitious tall buildings on the horizon," said David Farbman of NAI Farbman. "But today's skyscrapers are designed with post-9/11 safety in mind." The Fordham Spire includes extra emergency stairwells and other safety features.
 

Projects - Trump Jockeys for U.N. HQ Redevelopment

The Napoleon Bonaparte of commercial real estate, Donald Trump, declared his interest in redeveloping the landmark United Nations headquarters in New York, according to a report in USA Today. Trump, host of TV's The Apprentice, invoked his track record of Manhattan mega-developments, including Trump Tower, noting that lesser developers could get eaten alive by a redevelopment as grandiose and Byzantine as the U.N. headquarters. Could the United Nations be Trump's Waterloo? Stay tuned.
 

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